Why My Rental Properties are a Good Investment
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Back in the days when we were young and dumb, Holly and I decided that it would be a good idea if we got into the rental property business. Not only were we insane enough to buy one single-family unit, we actually decided to purchase two of them.
Everybody thought we had lost our minds at the time, but we went ahead and listened to our own instincts anyway. We were looking for ways to build residual income streams, and rentals seemed like a great way to do it. Now, almost 10 years later, I think it is safe to say that our rental properties have been one of the best investments that we have made.
However, owning rental real estate isn’t a passive endeavor. Sometimes, rentals can be a lot of hard work. Just last weekend, I decided that I was going to head over to one of the houses and spend the morning doing some light yardwork. Since the houses we own are both about 35 minutes away from where we live, we don’t have a chance to drive by them every day to keep an eye on them. I was sure that there would be some weeds to pick in the landscaping, but what I saw when I arrived made my blood boil.
Related: A Tree Fell at Our Rental House: Here’s What We Did
The landscaping didn’t just have some weeds, it was covered in them. All of the bushes and trees needed to be trimmed. I had a veritable forest of maple saplings growing out of the gutters. Needless to say, there was a lot more work to do than what I expected, which was irritating in itself. But what really got me upset was the fact that the renters were not only failing to keep up the property, they weren’t even trying. I was fuming, and for a few moments I was wondering why the heck we ever got into the rental game in the first place.
Why Our Rental Properties are a Good Investment
As I was scooping a sapling-filled layer of mud that was 3-inches thick from the gutters, I kept reminding myself that these rental properties are a good investment for us. Even though there are the inconveniences of dealing with renters and occasional repairs, I tried to focus on how buying these rentals has helped to set us up for financial success. Here is why:
Return on Investment
Sure, rental properties take an investment of both time and money. Yes, dealing with renters can be a total P.I.A. Yet, there is little doubt that we would have been able to make as much money as quickly as we did with any other investment. We put down a meager $10,000 on the mortgage for the purchase of one of our rentals. Additionally, we have spent about $5,000 in repairs since we bought it. The rent covers the mortgage each month, so we at least break even for every month that it is rented. Over a 15-year period, we will own a house that is worth about $100K, all paid-off by our renters. That is a profit of $75K, yo! Even if we had invested that $15K at an average return of 10% in the stock market, it would only be worth about $67K (before expenses) over that same time period. Although the cash isn’t as liquid as it would be in a financial instrument, we certainly come out ahead on this one.
One of the things that I love about owning real estate is that it is tangible. It isn’t just a number on a spreadsheet or a piece of paper in somebody’s wallet. It is real. It is something that will always have value because you can touch and feel it. Although everybody always talks about diversification with their investments in the markets, people seem to forget about diversifying their entire investment portfolio – which includes investing in things outside of the stock market. There are more ways to invest than just financial instruments, and real estate is one of my favorites. By spreading our investments around to include real estate, we feel like we are on a more solid footing to avoid major collapses across all markets.
The Long Game
Investing in real estate is not a short-term strategy. If you want to ensure that your rental properties a good investment, you have to develop a long game. Our rental properties are part of our long-term investment strategy. Once they are paid off, we will an additional source of income each month. We’ve created our own revenue stream. We can do a lot of things with this money. We can choose to reinvest it. We may use it to help pay for our children’s college expenses. Once we decide to retiree, we will definitely draw the rental income as a sort of self-made pension. The additional income gives us a ton of flexibility, and it only costs a little bit of effort.
When I’m elbow deep in gutter sludge, it can be hard to see that our rental properties are a good investment. Yeah, I grumbled. Yeah, I complained. Yes, I was ticked off. But, sometimes our long-term goals can only be supported with a little sweat equity. So, I put my head down, got out my gardening gloves, and went to work – not because I would benefit from it today. No. I did it because I want to provide my family with an even better future.
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We are moving across the country next month. We listed our house for sale at the end of May and really haven’t had too much interest. I listed it for rent last week and, again, not much interest – and I am not sure how I feel about that. Renting out our home is like the great unknown too me and it scares me. On the other hand, part of me liked the thought of getting a long-term renter and at the very least, continuing to build equity.
But then again, I wouldn’t be there to pull seedlings out of the gutters!
Ugh, that sucks. If you do decide to rent it out, I would highly suggest hiring a property management company to help you out. Since you won’t be there, that would relieve a lot of stress, plus they will be around to keep an eye on the property for you. Generally, they’ll collect rent, screen renters, fill vacancies, etc. for a percentage of the monthly rent. If I remember correctly, about 7-10% per month is about the going rate.
I had a townhouse in Myrtle Beach and we moved back to maine sfter 4 years of living in the south. My advice?use s management company and let them do all the work.they charge but you have no headaches. I learned the hard way…tom
I do strongly agree that rental properties can be a great way to diversify your portfolio. My wife and I almost pulled the trigger on one this summer. But unfortunately we just couldn’t go through with it. It’s just so much easier with our other investments; they never let the weeds and yard get out of control! 🙂
That is quite the return! When I lived in AZ, I had a boss who was buying houses at $50K a piece during the recession, but that’s no $10K!
Well, it was just 10K down, but yeah I’m pretty happy with it 🙂 We bought it when the rules were a little bit looser, too. Now, I’m sure we’d have to put more money down.
Yep! It’s great when everything goes smoothly! So glad we only have 2 rentals left . Our great long term renter just left, and the house needs lots of repairs and total carpet redo. The other is leaving at the end of this month, so l am sure that will be more money down the drain..good news is that there is already an interested party in the first one which is the biggie. The other is all paid off, and will eventually rent..but when it all happens at once..it sucks!!!! My handyman is tops though, and l retain a magic jack number just to stay in touch. He has saved us thousands!!!! Hang in there Greg.. 🙂
Oh, it always happens all at once Kemmy! The thing is, it goes smoothly almost all of the time, so it is especially annoying when it doesn’t go smoothly. Of course, I just need to remind myself of all that when things go wrong. Good luck finding new renters! I’m sure it will all work out well.
I am SO glad this turned out good for you. In part it has to be your financial-savvyness in addition to the market and location. I can’t say I could see myself doing it, personally. But I do believe that real estate can be one of the best types of investments you can make if you have the money.
Thanks Natalie! Honestly, I’ve learned how to fix a lot of stuff over the years just because I’ve had to. In general, rental markets are relatively stable for landlords. There will always be renters. With the housing crash a few years ago, there have definitely been more renters over the past few years, causing rates to rise as well. Luckily, we live in the Midwest where housing is cheap, which allowed us to get in the game in the first place. Had we lived in a place like LA or NYC (or even Chicago), we never would have been able to buy our first house. We’d probably be renters ourselves.
I’m glad to hear that your “crazy” investment 10 years ago is paying off so well. We are interested in purchasing rental properties for investment in the future so I have a few questions. Based on your experience, do you recommend single family homes over multi? And do you outsource any of the maintenance and repairs or do it all yourself? (Rental property maintenance was my husbands high school & college job so he’s got the skills.)
As far as multi vs. single family units, it depends on what you are looking for and how much risk you are willing to take on. Personally, we like single family units. That way, you only have one tenant to deal with. We also try to buy something that is a little nicer so that we can keep rents higher.
When it comes to maintenance, we do as much as we possibly can on our own. Generally, there aren’t too many issues, so I try to fix small stuff myself – minor plumbing, minor electrical, painting, etc. Otherwise, you’ll pay out the nose for that stuff. When it comes to the big jobs – like A/C repair – we call a contractor. Some contractors will allow you to go on a subscription plan, which could save you money. We choose not to go that route because we don’t use them often enough.
Hope that helps! Email me if you have any more questions.
That is great your rentals have been a great investment for you.
I’ve always wanted to try out renting and when I married my wife we moved into her house, so I put mine up for rent. It has been an good experience overall. Unfortunately for me, I am not making a profit on my rental. But all is not lost. The rent covers basically everything but the actual principal portion of my mortgage. So in essence, I have someone else paying my interest and I still get to write it off! Long-term we will be selling it, but for now, it’s not the end of the world.
Sounds like you are getting some benefit out of it. Have you thought about raising the rent at all? Maybe you could get the rent up to cover all of your expenses?
We have a single family rental unit and so far it’s been a good investment. The rent more than covers the mortgage payment. The only time it was a major PIA was last summer when our tenants moved out without notice and left the place a mess. It was the worst timing because we had a newborn and just didn’t have a lot of time to drop everything and spend days cleaning. So it took longer to get back on the market than we wanted. But overall it’s been a great purchase and we are glad we did it.
Oh I hear ya. The only time something goes wrong is when you really don’t want it to. Holly and I spent our 5th anniversary painting and remodeling one of our units after it was left a disaster. That was not fun, but it is just part of it on occasion. Luckily, we have screened our renters pretty well, so we have much more good luck than bad.
That’s not too shabby of a return Greg, I’d certainly take it. 🙂 I love the diversification aspect, not to mention having someone else pay off something you’ll get to keep as an investment for as long as you wish. I’ve wanted to get into real estate for some time now though have held back due to time. We’ve started looking at the possibility of renting our current house when we buy next year so our time may be coming sooner rather than later.
Awesome John. If you guys go that route, let me know if you have any questions. I’d be happy to help any way I can!
I think the rental business is a great investment for some people, but not everyone. We’ve toiled with the idea of rentals, but I don’t think we are cut out to be landlords. I am glad it is working out for you guys and like you said it really is a long game.
We really like real estate…like really like it 🙂 That is why we got into it in the first place. But, you’re right…not everybody is cut out for it. I can see why some people wouldn’t want to mess with it for various reasons. Overall, we love it though.
I would love to establish some investment properties one day. Your return really does sound good. Even if there are some bumps in the road with the tenants.
Our returns have generally been good, but what I love most is the extra layer of diversification that it gives us. Rental properties can be a lot of fun if you enjoy real estate!
10 K?!?!? Holy crap that’s inexpensive! It’s interesting about the lawn through. That’s the renters responsibility? At least here lawn care is covered in the rent. I’m glad. lol!
It was 10K down, but yeah, it was cheap. The lawn care doesn’t have to be part of the renter’s responsibility, but we included that in their lease.
I think it’s great you have rental properties. I’d love to buy an investment property down the road!
We think it is a great way to make relatively passive income. Most of the time, you don’t have to do much. However, they can cost you a bunch if you get bad renters in there.
We think rental properties are great investments and would like to eventually own 10 units, but we’ll see if that is overly ambitious. The whole someone else buying me a house concept is one I really enjoy, even if those someones are kind of annoying at times.
Amen to that. I’d like to put a few more in our portfolio as well…until I have a day like this one 😉
A couple friends and I have have had the same plan, buy a duplex and rent out half. I eventually had another idea and ended up buying a single family home and tried to start a small business(didn’t workout). My friend searched for years for a duplex but it turns out the vast majority are total disasters in need of serious work and the ones that were anywhere near remotely well maintained get snagged in a day. He’s now given up and looking for a cheap single family house.
I still think about becoming a landlord, right now I have a bad combination of single family homes not being very cheap but rent is cheap. That’s an inspiring story though that single family rentals can work.
Single family homes can definitely work. Rents in our area are still going relatively high for single family units. There is a lot of demand, but not that many nice rentals available. We’ve thought about doing a duplex at some point, but we are a little uneasy about it. Frankly, we prefer to keep the rents higher than what a duplex would probably allow.
As owning a couple rental properties ourselves, I agree with many of things you mentioned. Sure little stuff can get on your nerves, but in the end/long term it’s tough to go against having another income stream.
I’m surprised you let the renter handle the landscape part of it, might be worth $100 month to pay someone to take care of it and raise the rent the next lease, which I know you guys are a little against, but might make you sleep better, just an idea though. Good luck!
Yeah, that is definitely an idea that we are tossing around. It may come to that 😉
It’s a tiny little lawn and basically one small flower bed. I don’t need to pay someone $1,200 per year to take care of it. Mowing it myself would take 20 minutes. The renters wanted to take care of it themselves, but they don’t because they just suck! =)
Your rental properties worked out so well for you! I love the idea of owning rental property and when I move out of my condo I hope to continue to own it and rent it as an income property.
I think it is a great idea to keep your condo as a rental unit. As long as you have enough money for expenses and upkeep, rentals are great. You can always build that into your monthly rental fee as well. Let us know if you have any questions if you ever decide to go that route!
Oh boy… this post is very encouraging. There is a home for sale I have been eyeing that offers the potential to rent out the downstairs in-law apartment while living upstairs, or even renting out the two levels separately. I am sitting on the fence because I have never dived into real estate, but it looks like a lucrative field if pursued thoughtfully. I’m glad to hear your properties work out so well, despite the lack of care the tenants show toward the landscaping.
For us, they have worked out great. You’ll definitely want to properly research your local market before buying, but rentals can be lucrative if you do it right and have the money. Let us know if you have any questions, and good luck if you decide to pursue it!
I think single family homes are the best investment in the world if you have three things:
1. A customer service attitude
2. A backbone (of the metaphorical variety).
3. A Pile of Cash
I know a lot of people who have gotten in trouble because they thought they could pick two and get good results. Instead they’ve just ended up losing a lot of money.
Although I cut my metaphorical teeth in all kinds of customer service industries (and I was very good at it), I’m not sure I would agree with the customer service part. Obviously, you don’t want to be a slum lord (at least I don’t) and you want to keep things nice. However, I’m not really here to serve my renter. It is more of a transactional relationship. Having a backbone is definitely important, and you can certainly get into trouble if you can’t cover the cost of repairs. Those are two things that are a must, IMO.
We don’t have any rental properties but I have definitely seen how they can be a great long-term investment for the right people. Property in California is so high, which can make it tough to find a second property. We could never find one for $10k. 🙂 I’m glad you pointed that you and Holly view your real estate as non-passive income and a long-term investment. That’s where I’ve seen people make mistakes and end-up losing money.
Compared to a regular job, it is very passive. However, you have to stay on top of things as a landlord or you can find you can get into all kinds of issues – especially property damage.
Yep, I want at least one rental property to generate income as we get older. (We won’t be able to buy until probably our mid-40s.) It’s a long game. In the meantime, you have the stress of an additional mortgage, not to mention keeping the place up. But then it’s a revenue stream you can almost completely count on. People will always need a place to live, right?
Exactly. There will always be renters.
My parents actually have a rental property that is starting to make them a decent amount of money every month, it’s a pretty interesting way to invest your money and definitely be quite lucrative!
We like real estate, so for us, it is going to be a great income stream in retirement. Glad to hear that your parents’ investment is going well.
Hubby and I have thought about investing in a rental property, especially since he is handy around the house, but our biggest fear is getting stuck with the renter from hell and no matter how well you plan, sometimes you never know when they will pop up. It’s something we are contemplating, though, down the road as a diversification for our investments.
Oh, you will get stuck with a bad renter at some point. There really is no avoiding it, and it will cost you some money. You’ll learn from it, do some things differently, and move on (profitably) in the future.
I love the idea of getting into rental properties my husband not so much. The house we’re currently in would make a good rental property especially given we’re close to a military base (families constantly moving in and out of town don’t necessarily want to buy). Something we’re at least considering when time comes to move.
With your location, that is certainly something that I would consider. It can be a big commitment and it is long-term, so make sure you are both on-board before diving in 😉
Our plan is to spend the next 7-8 years working on our house (everything needs renovating…and I mean everything….) and then purchasing a second house. Instead of selling this house, we want to turn it into a stand-alone rental property. We have a renter right now in our basement apartment and it’s been great. It makes me excited about turning the entire house into a rental property. Sure we’ve run into some issues and I’ve had weeknights spent fixing things that went wrong, but I really can’t complain. Sometimes you need to put in the work to get the benefit.
Awesome DC! That is pretty much what we did with the first house we built. We made some updates, mostly cosmetic, then put it on the market to rent. It is a great little house, and we have wonderful renters in that one.
We have two rentals in Indianapolis, and agree that they are very nice from a cashflow perspective. So far, they’re outpacing the average stockmarket return, even after putting aside 10% of each gross rent dollar for maintenance and another 10% for vacancy. We’re nowhere close to those figures yet, but I’m sure we’ll see those costs someday. 🙂
Awesome! Good for you. Central Indiana is a great market 🙂
I always thought I\’d have rental properties but found out that REIT investments are just as nice without the hassle.
Owning rental properties isn’t for everyone, and I think REITs are a decent choice if you want exposure to the real estate market. The only thing with a REIT is that they are basically securities, so you don’t get that same level of diversification that you get if you actually own the units yourself. Since, I have a lot of money invested as “paper” in the markets already, I like the fact that I actually own a structure. I can do something with a building if the market crashes. I can’t do anything with a piece of paper. But for those who don’t want the hassle and want to invest in real estate, a REIT can be a good option.
Oh, I believe REITs provide even better diversification than local rentals. However, I will agree I can\’t game the tax deduction rules like folks I know who buy new furniture for their home, transfer the old furniture to the rental for tax purposes. 😉 Not me.
Ha! I need to do that next time I buy furniture 🙂
From a sheer numbers standpoint, you certainly are better diversified because you own small parts of multiple houses. However, it is all paper. You can’t divide a house by 1.3 million parts. But, like I said, I like REITs. I’ve invested in them before as well.
Good stuff man. Thanks for the discussion! I love talking real estate investing and getting all kinds of perspectives.
Rental property scares me! I think it can be a great investment but there’s so much that can go wrong. I had a rental townhouse in my early 20’s and that was a disaster. I was not ready for that in my life . When it was vacant, it really hurt financially. I would only consider rental property in the future if I had a very large bankroll and was retired.
Yeah, you have to be able to afford the maintenance or vacancy issues – and it sounds like you probably weren’t quite ready for it. Being a landlord definitely isn’t for everybody, but you can net some great profits if you do it correctly.
I continue to evaluate potential rental properties in my area to see if they’d be a good investment. I think you are absolutely correct that you have to think of a rental as a long term investment. Some of my greatest fears are getting into a property that ends up needing extensive repairs or dealing with tenant disputes or inconsistent renters.
I still have those fears, which is why we are pretty careful about screening our renters.
Real estate is something I would love to invest in because I agree that the immediate hassles are often worth it for the long term pay off, but my nomad lifestyle isn’t conducive to property management just yet. But someday when I figure out where I’m actually going to live, it’s definitely on the to-do list.
Ah, life in the theatre 🙂 Even though it can be a bit of a hassle sometimes, real estate really is a lot of fun.
I became an accidental landlord when we moved from Kentucky to Los Angeles and weren’t able to sell our house. We have a property management company take care of finding and dealing with our tenants and we pretty much break even. I also have my tenants take care of the yard work/landscaping and reading this makes me worry about the state of my rental! But, like you said, even if they don’t take care of the yard it’s still awesome to have someone pay for an income producing asset for me.
Well, your property management company should be keeping tabs on that as well. If not, I’d crack the whip on them 😉
We\’re looking to move back East in the next few years, and plan to buy 2 single family homes with the equity from it current place – one to live, one to rent. That is the one nice thing about living in such an expensive area. When you cash out, everywhere else seems cheap in comparison.
When we do though, we definitely plan to use a property manager. Having dealt with bad tenants in the past, it\’s worth it to have someone else manage the headaches.
There nothing like having someone else pay off your mortgage for you!
If I was in a larger city, I probably would consider using a property manager. But only having two places is pretty easy for us to handle, plus it saves us some money.
I’m really happy to read this because my husband and I are planning to do just this in the future! When we discuss it, we often get cold feet because you hear so many horror stories so this was awesome to read. We understand that it will be work and not a passive money-making stream but it’s awesome that you guys have been able to find such success with it. Good for you!
Well, the horror stories are a lot more fun to tell than the boring, “My renters pay their rent on time every month” stories. It is kind of like gambling stories in reverse 🙂 If you are interested in doing it, start researching your area. Where we are, you can usually get some better deals on houses after the school year starts.
Also your taxes benefit because you are deducting mortgage interest and depreciating the property. Plus your property should appreciate over 15 years for a higher sale. And your rent will probably go up in that time. It’s difficult to calculate the benefits of rental property fully, but it is quite good.
Two years ago, my husband and I took the plunge. We rented our home and bought 4 houses and a duplex on one property. We moved into the smallest to maximize income from the two properties and began our on the job training in being landlords. Being on the premises has cut down on some problems and created others. It’s the best investment decision we ever made. Not only will it provide us with retirement income, but we can’t outlive our savings this way. As a bonus, we will have something of value to leave to our children when we die. That means a lot to me.
I”m glad to hear that your decision to buy two rental properties really payed off for you guys! I love hearing about success stories like yours. My wife and I are still in the stage of renting an apartment so we haven’t even thought of actually buying a rental property. I think it would be a good idea to consider though. It’s good to know we can expect to put a lot of effort into it. I appreciate the advice! Thanks for sharing.
I would consider if you are unable to rent it out, why not air B&B your home? Pay someone to clean it and to give the keys to the individual staying there. People pay quite a bit of money to be able to stay somewhere nice or even sublet it?